I HOLD THIS TRUTH TO BE SELF-EVIDENT, THAT A DEBT CRISIS CANNOT BE RESOLVED WITH MORE DEBT

Friday, July 24, 2009

Economic Reality: It's Such A Bohr

A reader (thanks Debra) chastised me that I have no right to define economic reality. That's very true; but then again, I never claimed that my own definition of reality is objective and absolute. You see, I believe in the non-deterministic quantum universe as defined by Niels Bohr and Werner Heisenberg, i.e. the Copenhagen interpretation. "Reality" is a probability wave function that collapses to a single point when observed. In other words, the cat in the box is neither dead nor alive until I open the box and look inside.

It's the same with the economy: my observation defines my interpretation of it and not the other way round. For example, I was recently at a popular resort area and noticed that it was uncommonly quiet. For me, then, the economy is in sad shape. But then again, it could just be that the winds of fashion shifted and everyone was at another place.

Putting it another, more familiar, way: when my neighbor gets fired, it's a recession. When I get fired, it's a depression.

Apropos of this, then, unemployment statistics are also open to interpretation. Weekly claims for unemployment insurance are adjusted for seasonal effects and are heavily influenced by fluctuations in auto manufacturing. But because of the recent widespread troubles in the auto industry, factories have been shutting down much earlier than usual - some of them permanently. This caused the seasonal adjustment to calculate a smaller than "expected" number of claims for the past few weeks - even as the un-adjusted number rose.

Continued Claims For Unemployment Insurance

We should re-examine all of our seasonal and inflation adjustments with an eye to the new "reality" of the economy, as it exists right now. I will, therefore, ignore adjusted numbers altogether from now on and just look at the raw figures. After all, reality is as we experience it, not as adjusted by someone's theory..

42 comments:

"Reality is as we experience it."I ALMOST totally agree. (But then I never totally agree with ANYONE, even myself...)I think that we have been collectively discounting our own PERSONAL experience (as derived from OUR interpretations of what our senses tell us) in favor of listening to experts (mostly rattling on in books or some other media form) for too long now.I wasn't really getting on your case. But what I said about the accountant setup still seems pertinent to me...If I understood your post correctly, that is.

With regard to yesterday’s post, I hope you continue to follow that CIT story. Keep asking those questions. Whether or not it fits a legal definition of fraudulent conveyance it is clear that some CIT bondholders (PIMCO) will front-run the bankruptcy process.

From Bloomberg: (my emphasis)Bondholders including Pacific Investment Management Co. that provided the loan got a 5 percent fee for the first $2 billion of the rescue, and annual interest of at least 13 percent. On top of that, the New York-based company pledged assets worth more than five times the amount of the loan as collateral.

In the debt swap, holders of $1 billion of floating-rate notes due Aug. 17 are being asked to accept 82.5 cents on the dollar for the debt.

Advisers to the bondholders that provided the financing may push the company into Chapter 11 bankruptcy after the debt swap, according to people with knowledge of the matter.

But why the new maneuver? The traditional method has been to short the stock, buy CDS, and then force the co. into a BK. The answer must be that shorting a $0.50 stock in a dead company offers little upside, AIG may finally be hesitant to take their traditional position in the CDS, and that CIT assets are worth more in a liquidation than a possible gain on that earlier strategy. CIT has a leasing business (like GE) which Buffet wanted. Cheapskate wouldn’t pay for it. And the collateral on the retail & trade finance they hold must be sound. Certainly nobody ever told me that I could factor >100% of my accounts. There have been no sub-primes or Alt-A’s for small businesses. And trade finance just doesn’t work like that at all. Those being the only CIT businesses that I know of.And that then implies that CIT’s problems are liquidity (I understand they borrowed heavily in the corporate markets – now gone) not insolvency. So, of course, no need for a government loan! Govt only loans to “well capitalized institutions”. I’m only speculating. I don’t know any of this for sure. Maybe reading too much blog.

One potato two potato three potato fourFive potato six potato, seven potatoMOREThanks for the defense, Thai. I liked the article about Virginia Woolf.On the subject of poetry, three weeks ago I was in Stratford for the RSC production of A Winter's Tale.Damn. That sure is fine language that I can get my teeth and my mind into.By the way, Hell, our crusading president, le petit Nicholas would SURE LIKE to put together data banks of our citizens starting at age 3 to be able to PREDICT which ones will become delinquants.Numbers, numbers, numbers.They will be the death of us...

So good to see Obama's foreign policy bearing such bountiful fruit so quickly.

If he manages to do as well in Iraq and Af-Pak, the boys should all be home for the holidays and the money saved will be more than enough to fund the year end bonuses for the 'giant vampire squid wrapped around the face of humanity' (to quote from Matt Taibbi's latest article in Rolling Stone).

Yoyo, mucho thanks for that incredible article from Matt Taibi in Rolling Stone : you should have stuck in a link. Y'all really should read through all ten pages of that article about the gangsta organization called Goldmann Sachs. It is long, but :1) Matt makes his points about economics with no charts, and FEW numbers...(Admittedly he's talking about history...)2) his language is fresh, vital, and he calls a spade a spade.3) you will get VERY VERY angry reading this article, as you should.

By the way, Yoyo, political correctness (i.e. autocensorship) SHOULD shut my mouth about ONE aspect of the Goldmann scandal that Taibi does NOT comment on, but, suffice it to say in the list of all those names, if Adolf or a modern day equivalent were around to get hold of this article, the shit could hit the fan...

Two points in my book : GOTTA get rid of insurance thinking. It is the foot in the door which has made most of this craziness possible. AND : a major problem is what I continue to point out : money doesn't MEAN anything to us any more. (Careful, you can be greedy about all those NUMBERS, but money STILL doesn't MEAN anything to you...)

I can hear the wind blowing through that monstrous, terrible, teetering Tower of Babel in Matt's article. Like Joe ?

"AIG is what happens when short, bald managers of otherwise boring financial bureaucracies start seeing Brad Pitt in the mirror...(AIG) blew it all in a year or two by turning their entire balance sheet over to a guy who acted like making huge bets with other people's money would make his dick bigger."

WRT political correctness and censorship, Taibbi has already been savagely attacked for that article's (Bubble Machine) supposed anti-semitic undertones and he basically told them to go shove it.

If They Who Must Be Obeyed have their way with the First Amendment, that may not be possible for much longer.

Money doesn't mean anything to you? OK fine, you happen to come into some money from labor or luck send it on over to me or Goldman Sachs, and I don't want to here any complaints about the money vampires.

Since I live in a country where health care is rationed, to those that have money, my health, ergo money still means something to me.

Marcus, you are missing my point. Money doesn't mean anything to US (like the human SPECIES) when we are lightly tossing around those billion trillion zillion numbers. When it would take like, 100,000,000 years or some godawful number like that to pay back the national debt.The mind boggles after a while, Marcus. It goes out of touch, and we go into cloud cuckoo land with the equations. Like, you know, Lovecraft's world, or maybe Schroedinger's you take you pick, they're the same to me. (Calling ONE fantasy and the other, well, SCIENCE is not particularly convincing, Marcus, and it's not because it's in Wikipedia that it's... uh, GOSPEL, right ?Remember that those Goldman types could never manage to SPEND all that filthy lucre in ONE lifetime.Just not possible.

I know that this is off topic, however, I thought that Geithner fans might find this interesting…..

http://www.salon.com/opinion/greenwald/

SUNDAY JULY 26, 2009 08:27 EDT

The war being waged on the TARP watchdog’s independence

“…Barofksy’s clashes with administration officials have intensified of late. Last week, he issued a report documenting that the actual amount of taxpayer money theoretically put at risk in the bank bailout — once Federal Reserve, FDIC and other programs are counted — is $23.7 trillion, not the widely cited figure of $700 billion, a report that prompted attacks from the White House and Treasury on his credibility….”

“…Jake Tapper conducted a 20-minute podcast interview with Barofsky, and I really recommend that everyone listen to it (it can be heard by clicking PLAY on the recorder below or can be downloaded here)….”

Economic depressions which feature deflation, as ours does presently, effect crimes rates in very specific ways. Wait until the nation is experiencing hyper-inflation and reports on crimes rates will show very different statistics on crime.

There's no doubt that Goldman Sachs, or any other proprietary trading firm, could indeed lose tens of millions of dollars from its proprietary trading if their strategies are stolen — and that is very serious. The competitors that obtain access to these trading secrets could (and would) use it to front-run or trade against it, ruining even the most well-planned tactics.

That seems to beg the question: "Then why should Goldman Sachs be allowed to do it?"

Debra, You sound intimidated by numbers. The equations and calculations are very simple, except for someone ignorant of basic math.

There is a difference between fantasy and reality. If an engineer gets mixed up about the difference between a million and a billion lbs. of pressure people die, just as people suffer when they get confused or conflate millions and trillions. What's the difference? Oh just 10,000 times difference.

Careful, Marcus, you're heading into foul territory... and I didn't take you there.We all try to play fair on this blog.You're right, I'm not great at maths. But... we all have our talents, and ours apparently are not the same.I happen to feel that it's important to question ALL dogma, wherever it comes from.

Debra, My intention is not to insult you. My response to Thai OTOH is in response to provocation by deliberate dumbness. No shame in ignorance, we all are ignorant to great measure. My point was to emphasize the simple understanding of math necessary to make sense of economics (or large numbers).

When you throw your hands up about a relatively simple problem that a bit of education would fix, and confuse reality with fantasy you play into the hands of people that would rape you. Is there any difference between rape and fantasy?

If I understand and simplify your point: a deflation moves crime away from property to cash (e.g. bank robberies and greater organized crime such as Yakuza), whereas inflation moves crime patterns in the opposite direction?

I guess this might explain some trends I have read about in the papers recently; it is my understanding that crime dropped in the 30s (except apparently for bank robbing).

... Kind of reminds me of that Robert Frost poem

Some say the world will end in fire,Some say in ice.From what I've tasted of desireI hold with those who favor fire.But if it had to perish twice,I think I know enough of hateTo say that for destruction iceIs also greatAnd would suffice.

... I guess from a personal safety standpoint, ice is looking better and better

And MY broader point is that social behaviors with costs we tend to ignore could change in very meaningful ways as a result of this, and this could be good or bad depending on your point of view.

Will we see changes in birth rates? Pregnancy and related issues are obviously one of the very big ticket health care expenses and changes in fertility would have a market effect on this.

Such a change would be a very significant indicator of what is happening in the real economy (to use Hell's phrase)

Yes, that's correct, Thai. Now take it further and you may see that when the sort of theft that involves the purloining of things becomes vastly preferred to stealing that in which the things are priced in, chaos ensues.

When quotidian necessities wind up in very short supply, they become, of course, the preferred objects of theft. At that point everyone, by definition, becomes a target, not just of theft, but of all the crimes that may potentially be associated with the theft of personal effects.

It's one reason, but there are others, why Hyper-Inflationary Depressions are much more stressful than deflationary Depressions. But, like supernovae, because they are so intense, hyper-inflations tend to burn out much more quickly than deflationary depressions. How's that for a silver lining. Speaking of which:

Here I was just getting pleasantly comfortable with the idea that a long cold winter might not be so bad, and you go and dangle the possibility we can all get though this together by tolerating a rather nasty D.C. summer with the crime rate of Johannesburg South Africa. Kind of a Spike Lee version of the future, only on steroids.

Thank you for your unexpected support, Okie.I happen to feel that you... CORROBORATED my observation, although I'm not sure that Marcus will see things this way, will you, Marcus ?Edwardo, I'm not sure that I understand your point, as it seems to me that violent crime rates are (unexpectedly) dropping in big cities in the U.S. at this time. Another reminder that human behavior is ultimately UNPREDICTABLE ? (Insurers and economists everywhere take care.)On the subject of price tags, I liked Joe's remark in the comments section and basically agree with him.The balloon is deflating at the rate that we are rapidly approaching that very BASIC BASIC assumption that : value is assigned by tacking on price tags.For the more squeamish of you, I will remind you that this basic assumption, whether or not invented by the rabbis, has traversed Jewish culture since its inception. It has been unquestionably accounted PROGRESS to assign price tags to human beings in order to calculate indemnities in INSURANCE situations, (and this is an ancestral practice). (Thai, this ties in directly to your cost analyses.)But... we have blindly closed our eyes to the fact that sticking on that price tag at the very beginning ENSURES that we will ultimately stick price tags on EVERYTHING. It all hangs together.And I submit that we are collectively getting a little tired of this way of seeing things, and this way of assigning value. I send you back to the story of the American tourist in Turkey 50 years ago whose wife was beheaded while he went searching for the owner of a sheep he had accidentally run over on a remote road, IN ORDER TO HAND OVER A SUM OF FILTHY LUCRE.We have been taking our basic assumptions for granted for TOO long, now. And mistakenly thinking that the "solutions" they propose are the ONLY ones, rational or not.

"Shudder.. Have you heard of Philip K. Dick? The Minority Report and Pre-Crime..

Damn, the man was a genius."

Weird! I just read a collection of short stories by him including The Minority Report. And I agree he was a genius, even if sadly the paranoid and tormented type. A lot of his stuff was written in the 50s/60s and was conceptually ahead of its time, but there were some interesting cultural things that he didn't foresee (like doctors not smoking in examination rooms or women/non-whites having real jobs, but c'est la vie).

But I digress. I also was reading some stuff about evolution and morality. It seems neuroanatomists are getting closer to being able to pin down which area(s) relate to being able to empathize with others. So maybe someday we can test politicians for deficiencies. And I'm sure they'll howl about being prejudged, but again, c'est la vie.

And another damn thing. So many studies have shown that people will pass up $ to punish someone who is not playing fair (ie a player is given $10 to distribute between himself and a partner; if the partner doesn't accept both get $0; if he doesn't offer at least ~$3 the partner usually prefers punishing over $). So we can extrapolate that people won't participate in a system that they don't perceive as fair. I honestly think the Wall St elite may want to pause and consider this and what it implicates for their futures.

"I was recently at a popular resort area and noticed that it was uncommonly quiet. For me, then, the economy is in sad shape. But then again, it could just be that the winds of fashion shifted and everyone was at another place."

About Me

I was educated as a chemical engineer but spent almost my entire career in finance, particularly in money, FX and bond markets. The name stands for Hell-as-IOUs and the picture points to Quixotic endeavors.